Hui and Png (2003)
|Hui and Png (2003)|
|Title:||Piracy and the Legitimate Demand for Recorded Music|
|Author(s):||Hui, K. L., Png, I. P.|
|Citation:||Hui, K. L., & Png, I. (2003). Piracy and the legitimate demand for recorded music. Contributions in Economic Analysis & Policy, 2(1).|
|Link(s):||Definitive , Open Access|
|Key Related Studies:|
|Linked by:||Fukugawa (2011), Giletti (2012), Grolleau, Mzoughi and Sutan (2008), Liebowitz and Watt (2006), Zentner (2005)|
|About the Data|
|Data Description:||Data sources:
|Data Type:||Secondary data|
|Secondary Data Sources:|
|Data Collection Methods:|
|Data Analysis Methods:|
|Cross Country Study?:||Yes|
|Government or policy study?:||No|
|Time Period(s) of Collection:||
Publishers of computer software and music claimed losses of nearly $16 billion to piracy in 1999. Theoretically, however, piracy may raise legitimate demand through positive demand-side externalities, sampling, and sharing. Accordingly, the actual impact of piracy on the legitimate demand is an empirical issue. Addressing this issue in the context of recorded music, we develop and test hypotheses from theoretical models of end-user and re-seller piracy on international panel data for music CDs. Empirically, we find that the demand for music CDs decreased with piracy, suggesting that "theft" outweighed the "positive" effects of piracy. However, the impact of piracy on CD sales was considerably smaller than industry estimates. Further, we estimated that, accounting for both demand losses and price adjustments, the industry lost no more than 6.6% of revenue to piracy.
Main Results of the Study
- In theory, piracy may raise the demand for a legitimate information product. If the positive influences were strong enough, they could outweigh the negative effect of piracy due to the theft of customers.
- Our results for music CDs suggest otherwise. The coefficient of the piracy variable was negative and significant. Even if such positive effects did exist, they were more than offset by the harm caused by the loss in sales due to “theft”.
- The data set further allowed the authors to investigate in detail the presence of an indirect network effect, by which higher piracy increases the ownership of CD players, which in turn stimulates the demand for legitimate music CDs.
- The results showed that the demand for legitimate music CDs was indeed positively associated with higher CD player ownership. However, the correlation between the pirated quantity and CD player ownership was quite modest, and not statistically significant. Pirated music did not have a significant complementary effect on the demand for CD players, and hence it might not have contributed to the raising legitimate demand through an indirect network effect.
- The authors estimated that piracy caused legitimate sales to fall by 0.0954 unit per capita. Assuming that prices remained constant, the average revenue lost to piracy would have been 6.6%. This estimate exaggerates the actual revenue loss because it assumes constant prices. It is lower than the revenue loss that we calculated that a monopoly would have suffered.
Policy Implications as Stated By Author
- The results suggest that piracy would affect legitimate producers both directly by drawing away demand and indirectly by inducing them to reduce prices: evidence which could have an effect on policy-making in this area.
Coverage of Study
|Level of aggregation:||Country|
|Period of material under study:||1998|